April is here and the All Star Financial Team is pushing forward to Tax Day 2018. With that in mind, we wanted to share four last minute ideas that can make tax year 2017 more efficient for you if you have not yet filed your return. The contributions described below must be made by April 17th to qualify for tax year 2017.
- Maximize your 2017 Health Saving Account (HSA) contribution: HSA accounts are extremely efficient for saving and paying for qualifying medical expenses. In order to qualify for an HSA account, you need to be in a high deductible health insurance plan. Check with your employer to see if you are eligible if you do not already have a HSA account. The contribution limits are $3,400 for individuals or $6,750 for families and there’s a $1,000 catch-up contribution for ages 55 plus. The benefit of an HSA is three fold:
- Your contributions are made tax-free (you can get a tax deduction if you make them out of pocket)
- You can invest the funds within the HSA and not pay tax on the earnings
- Distributions from the account are not taxed if they are made for qualified medical expenses
- Maximize your 2017 Traditional IRA contribution: In a Traditional IRA you are saving pretax money and getting a deduction on your tax return (similar to an HSA), while your investment gains grow tax-deferred. However, you pay ordinary income when you withdraw money from your IRA. Traditional IRA contribution limits are $5,500 with a $1,000 catch-up contribution for ages 55+. The income limits for individuals are $62,000 adjusted gross income and then it’s phased out up to $72,000. If you file married filing jointly the income limits are $99,000 and then it’s phased out up to $119,000. The income limits are not applicable if you are not eligible for an employee sponsored retirement plan.
- Maximize your 2017 Roth IRA contribution: Contributions to Roth IRAs are made with dollars you’ve already paid taxes on, but your money grows tax-deferred and is NOT taxable if you withdraw after age 59 ½. Roth IRA contribution limits are $5,500 with a $1,000 catch-up contribution for ages 55+. The income limits for individuals are $118,000 adjusted gross income and then it’s phased out up to $132,999. If you file married filing jointly the income limits are $189,000 and then it’s phased out up to $195,999. The income limits are not applicable if you are not eligible for an employee sponsored retirement plan.
- If you exceed the income limits described, consider your ability to make a “backdoor” Roth Contribution: This strategy provides an opportunity for high income earners to continue adding funds to their Roth IRAs. There are some complicated rules that apply to these contributions. For example, if you have a balance in a pre-tax qualified account (Traditional IRA) outside an employer plan, the “pro-rate” rule may make this strategy inefficient. If you are interested in this strategy please reach out to our team or your advisor to evaluate whether it is efficient for you!
Over time, maximizing the tax efficiency of your saving using qualified accounts can significantly enhance your net worth and flexibility of distributions during retirement. Please consider these strategies prior to April 17th and let us know if you questions!
CFO, COO, Senior Wealth Manager